A New Currency is Coming

Bitcoin, the virtual currency, is making some serious advances.

Over the past two months, it has increased its value by more than double against the dollar, and is presently trading at record levels, as CNET reports. As of late February, it was trading at nearly $32 per share—that’s up from January’s mid-teens. Let’s take a quick look at what’s going on.

CNET reports that Bitcoin originated back in 2009 as a peer-to-peer currency, meant to avoid online law enforcement. Typically, users simply went to online exchange sites where real-world currency (say, the U.S. dollar) could be exchanged for Bitcoins.

From there, the virtual currency rapidly garnered interest. Now its largest exchange, Mt. Gox (based out of Japan), has reached a deal with the startup company CoinLab. ArsTechnica reports that CoinLab will handle all of Mt. Gox’s American operations, with the actual transition set for March 22.

CoinLab is a story unto itself. Last year, the company floated a proposal that would allow Bitcoins to be exchanged for in-game currency in titles like World of Warcraft or the ever-popular Second Life.

The company raised $500,000 in venture capital funding, and now that CoinLab will assume Mt. Gox’s U.S. portfolio, it stands to become the single largest global intermediary between virtual and real currency.

VentureBeat reports:

“There are two major difficulties Bitcoin exchange customers have traditionally faced: banking troubles for the underlying exchange, and security of their coins,” CoinLab CEO Peter Vessenes said in a post announcing the move. “Since we believe in Bitcoin, we’d like to solve these problems.”

Bitcoin has had a dramatic ride over the past two years. CNET reports that in June 2011, Bitcoin hit a record price of $31.90, but later in the year, it dropped all the way to $2. However, once the popular blog platform WordPress stated that it would begin accepting Bitcoin payments around mid-November of that year, Bitcoin’s fortunes improved dramatically.

Soon enough, other major websites and operations followed suit; Reddit began allowing Bitcoin payments, and then the Internet Archive opened up to Bitcoin donations, as VentureBeat reports. The Bitcoin company Coinbase claimed that it processes more than $1 million in Bitcoins per month.

Mt. Gox found its operations hindered by its lack of proximity to the tech sector. The deal with CoinLab now moves it into Silicon Valley, so there is every reason to expect a rise in Bitcoin’s fortunes in the near future.

Particularly in light of the ongoing economic turmoil around the world and a significant shift toward safe havens, wealthy investors are keen on Bitcoin. For example, ArsTechnica indicates that CoinLab CEO Vessenes has had inquiries from people wishing to purchase Bitcoins in the 7-digits range. That’s obviously a major transaction, and CoinLab’s digital architecture makes possible the sort of high-level encryption and other security measures that such investors would expect as par for the course.

ArsTechnica quotes Mark Karpeles of Mt. Gox on the deal:

“This should be a huge win for everyone—faster deposit and withdrawal times, easier-to-reach customer service, and better access for United States financial markets, market makers, and liquidity providers.”

At any rate, by exposing Bitcoin on a large scale to the American market, both Mt. Gox and CoinLab stand to gain in the long run. Investors would trust a company that openly shows its desire to comply with American law, while CoinLab’s Silicon Valley credentials are subject to open scrutiny. Also, now that the exchange funds will be squarely within U.S. jurisdiction, customers are likely to feel that much safer.

Gold has had a long run and saw high prices as investors turned to it as a safe haven against inflation and economic uncertainty. However, recent murmurs of production constraints and a “gold peak” may well indicate that Bitcoin will experience a rise to prominence.

Thus far, its fame has largely been restricted to the digital domain, where it has become very popular across a wide variety of web payment platforms. It remains to be seen how widely CoinLab (and Mt. Gox) can push its popularity across North America.

For convenience and versatility, though, a digital currency can be hard to beat. Right now, Bitcoin remains a highly attractive proposition; it is still hovering near the low $30s.